The Compensation Principle

Abstract

Extension of Pareto’s conditions was attempted when N. Kaldor [1939] discussed a change which improved the welfare of some members of the community only at the cost of others. Here was a situation in which Pareto’s principles could not help directly, since if any suffer from a change, welfare comparisons can be made only by involving distributional judgements which Pareto particularly avoided. Unfortunately in practice most economic decisions involve just such combinations of loss and gain; changes which incur only benefits for all members of society are usually undertaken without needing specific economic analysis. Problems arise when gain for one sector of society can be achieved only at the cost of decreased welfare for another.